A company is planning to move to a larger office and is trying to decide if the new office

should be owned or leased. Cash flows for owning versus leasing are estimated as follows.

Assume that the cash flows from operations will remain level over a $10-$year holding period.

If purchased, the company will make an equity investment and finance the remainder with an

interest$-$only loan that has a balloon payment due in year $10.$ The company$$s marginal

income tax rate is $30\%$ and the after$-$tax cash flow from sale of the property at the end of year

$10$ is expected to be $$800,000.$ What would the initial equity investment have to be to

generate a $15\%$ incremental rate of return on equity with owning instead of leasing?

Own Lease

Sales $900,000900,000$

Cost of goods sold $350,000350,000$

Gross income $550,000550,000$

Operating expenses:

Business $85,00085,000$

Real Estate $45,00045,000$

Lease payments $0140,000$

Interest $65,0000$

Depreciation $50,0000$

Taxable income $305,000280,000$

Tax $91,50084,000$

Income after tax $213,500196,000$

Plus: Depreciation $50,0000$

After$-$tax cash flow $263,500196,000$

Answer:$\_\_\_\_\_\_\_\_\_\_$